Why Is Inflation So High Still?

Why Inflation So High? (Photo: Chase Bank)

Why Is Inflation So High Still? The Main Drivers Of Rising Prices

Consumers are experiencing the effects of extremely high inflation. As the cost of living rises and their purchasing power decreases, households are struggling to meet their expenses.

While it is widely acknowledged that inflation is a concern, there is no singular cause for this financial strain. Below are some of the primary factors that contribute to the damaging impact of inflation.

Inflation hitting households

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Households are being affected by inflation. The most recent Consumer Price Index from the U.S. Bureau of Labor Statistics indicates an 8.2% increase in costs for urban consumers over the past year. This implies that households are encountering greater expenses. However, which goods and services are experiencing the most significant changes?

The report states that gasoline expenses have risen by 19.7% compared to last year. Additionally, energy services have seen an increase, with electricity costs up by 15.5% from the previous year.

Food is another area experiencing higher costs, with a 13% increase in the cost of food consumed at home compared to this time last year. The cost of dining out has also gone up by 8.5%.

These elevated costs are causing significant financial pressure on household budgets, which is noticeable when filling up your vehicle or paying for groceries.

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Main Drivers of High Inflation

In moderate amounts, inflation is generally viewed as beneficial for the economy. However, when inflation exceeds the Federal Reserve's annual target of 2%, exorbitant prices can have adverse effects on the economy.

Here is a global perspective on the primary factors contributing to high inflation.

- Supply and demand mismatches

Supply and demand imbalances have been a major issue since the onset of the pandemic. It has become customary for many of us to encounter out-of-stock items in stores. If inquired, store managers usually attribute the issue to supply chain disruptions.

As we gradually move beyond the pandemic, some households are experiencing high demand for particular items. For instance, many households wish to purchase cars. However, a decrease in the supply of new vehicles due to difficulties in obtaining necessary components has resulted in an ideal scenario for rising vehicle prices, despite constant demand. Fortunately, the used car market is stabilizing.

The vehicle industry is not the only sector facing a mismatch between demand and supply. Whenever demand exceeds supply, prices tend to increase.

- Energy costs

Energy sources are vital for the functioning of the economy.

Since the Russian invasion of Ukraine, there has been a major disruption in the global energy supply chain. This invasion led to the imposition of sanctions on Russia by Western nations.

As a result of these sanctions, Western countries can import less oil from Russia. With fuel sources becoming increasingly scarce and unpredictable, the cost of powering the economy has skyrocketed. The increase in energy costs puts inflationary pressure on other goods and services, as the expense of producing the goods or offering the services is now higher.

For instance, the cost of food may increase as a result of higher energy costs, which can increase the expenses of refining and transporting the goods to grocery stores.

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The Fed’s reaction to inflation

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While the Federal Reserve regards a modest level of inflation as desirable, the current inflation rate is well above the target of 2%. In an effort to address inflation, the Federal Reserve started raising the federal funds rate earlier this year.

The central bank implemented the first interest rate increase in May, followed by numerous other increases. As of early November, the federal funds rate had been raised again, to a target range of 3.75% to 4%.

The Federal Reserve's objective in raising interest rates is to counter inflation. Higher interest rates increase the cost of borrowing.

In the end, increased borrowing expenses are likely to dampen consumer spending. Individuals who require loans will be forced to pay more for the opportunity.

However, after a series of rate hikes, inflation has not decreased as significantly as originally anticipated. Only time will determine what actions are necessary to control our current inflationary climate.

How to invest in light of inflation

During times of high inflation, many households prioritize finding ways to make ends meet. However, for those who can invest, it is important to focus on real returns, which consider returns after taking inflation into account. For instance, if returns are 10%, but inflation is at 8%, the real returns would be only 2%. To combat inflation, many investors opt to diversify their portfolio with investments in bonds, precious metals, and commodities.

While monitoring various asset classes in a portfolio can be time-consuming, investors can consider leveraging artificial intelligence (AI) through Q.ai's Inflation Kit to handle this task. By using AI-powered portfolios, investors can adjust their investments based on their risk tolerance and goals in the current volatile marketplace without the need for daily monitoring.

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Source: https://www.forbes.com

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